Smart Financial Oversight: What Nonprofit Boards Should Know

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By Petrea Moyle Marchand and Jill S. England, Attorney at Law

Nonprofit boards are responsible for ensuring their organization complies with relevant laws and regulations, as

well as operates ethically, effectively, and in alignment with the nonprofit’s mission. Responsibilities include financial oversight, strategic planning, risk management, and program evaluation. Petrea Moyle Marchand and Jill S. England, Attorney at Law developed this Top 10 list for one of these responsibilities, financial oversight. The list is based on their combined 45 years of experience working with nonprofit boards to support sustainable operations and governance. [1]

Know the Difference

An unethical action, defined as an action that knowingly violates accepted moral principles or standards of conduct, is not necessarily an illegal action, defined as an action prohibited by law. While an unethical action may cause great harm to a nonprofit, the action will not result in legal consequences or restitution

YOUR QUESTIONS ANSWERED

Why Is Financial Oversight Crucial?

Financial oversight helps a nonprofit ensure transparency and accountability, comply with legal and regulatory requirements, manage risk, ensure long-term sustainability, and build donor confidence and support. Financial oversight also ensures a board stops unethical or illegal actions before they cause harm to the organization or the individual responsible for the action.

What Risks Does Financial Oversight Reduce?

Nonprofits risk misuse of funds, including fraud, embezzlement, or unauthorized expenditures, without financial oversight. Nonprofits may also experience financial instability, such as budget deficits, and legal issues, such as loss of their tax-exempt status or breach of contractual obligations. Financial oversight also can reduce the risk of honest mistakes by staff compounding over time into a significant financial issue.

Think It Can’t Happen To You?

Ms. England and Ms. Marchand have together coached over a dozen nonprofits and special districts through the serious repercussions resulting from a lack of financial oversight. In each situation, the board was blindsided by the misuse of funds and the nonprofit was forced to invest substantial time and money to remedy the harm. In some cases, the board did not know board members are potentially liable for a nonprofit’s misuse of funds. In addition, the individual responsible for the unethical or illegal action was often a first-time offender facing a difficult circumstance in their life or in their position with the organization. Sadly, all the situations could have been avoided had the board made financial oversight a priority.

LESSONS FROM THE FIELD

EXAMPLE 1

An Executive Director used over $1 million for a specific purpose consistent with the organization’s mission, but not consistent with the Board-approved or legal use of the funds. The transfer was not illegal and the Executive Director quit but did not otherwise face any consequences. The organization was threatened with a lawsuit.

EXAMPLE 2

An Executive Director embezzled over $100,000 from a nonprofit to help a family member in crisis and went to jail.

EXAMPLE 3

An Executive Director spent over $50,000 without Board approval on uses consistent with the organization’s purpose. The expenditures were unethical but not illegal. The Executive Director voluntarily left the nonprofit and the board spent tens of thousands of dollars fixing the organization to prevent future misuse of funds. The board did not recover any of the misused funds.

EXAMPLE 4

An Executive Director embezzled over $70,000 dollars. The

bookkeeper noted financial irregularities but did not tell the Board for fear of losing her job and the absence of an employee

whistleblower policy. After over a year of investigation, prosecution, and significant expenditures to remedy the harm, the Executive Director pleaded guilty and paid partial restitution to the nonprofit but did not go to jail.

EXAMPLE 5

A low level but trusted bookkeeping employee embezzled thousands of dollars by setting up fake vendor accounts with names close to real vendors, altering checks after they were signed, and funneling the money to themself through the fake accounts.

TOP TEN RECOMMENDATIONS

Conduct External Audits. The Finance Committee or the Treasurer should schedule an internal audit midway through the fiscal year to review financial records, record keeping, and compliance with financial policies and procedures and report back to the full board. Non-profit organizations with less than $2 million in annual revenue should request an external audit every 2-3 years at a minimum. Non-profit organizations with annual revenue of $2 million or more must establish a formal audit committee and conduct an external audit annually pursuant to California’s Nonprofit Integrity Act [2].

Train board members to review financial reports. Nonprofits should hire an independent third party to train all board members to review financial reports and ask questions. At a minimum, the Treasurer and the President should ask questions
about the financial reports at every board meeting to stimulate discussion and
encourage learning.

Require board review and approval of IRS form 990. Nonprofits are required to
submit the IRS form 990 every year, including breaking out expenses by fundraising, program service expenses, and management and general expenses. The board should ensure the nonprofit is categorizing expenses using these three categories in the nonprofit financial system and review the report before submittal.

Maintain financial records. At a minimum, the Treasurer and President should have access to an online filing system containing the financial reports for each month, as well as receipts, copies of checks, and other records of financial transactions necessary to facilitate transparency and accountability. The Treasurer should check the filing system monthly to ensure it is up to date.

Require two approvals for all financial transactions over a board-designated amount. The board should set limits on the amount staff can approve consistent with the budget as an internal control in the financial policies and procedures. For amounts in excess of the board-approved amount for the Executive Director and under the amount required for full board approval, the board should require the Executive Director to secure email approvals from two board officers for the expense and save them in the designated folder for financial transactions.

Approve conflict of interest, ethics, and whistleblower policies. The board should approve conflict of interest, ethics, and whistleblower policies for both the board and staff to ensure clear guidelines for reporting when misuse of funds is suspected. If policies for conflicts of interest, ethics, and whistleblowing applicable to employees are in the employee handbook, the board should establish similar policies in separate documents that are applicable to board members.

Approve an annual budget and work plan prior to the start of the fiscal year. The board should approve a budget and annual work plan before the start of each fiscal year. The work plan should be consistent with the strategic plan, if the nonprofit has one, and identify priority items and deadlines funded in the budget.

Develop Board-approved financial policies and procedures. The board should
review the Blue Avocado financial policies and procedures template and ensure staff create or update financial policies and procedures consistent with the template. The financial policies and procedures should be comprehensive enough to ensure internal controls consistent with the nonprofit’s risk tolerance and structure, as well as describe the budget process. The board should review the board-adopted policies and procedures annually and update as needed. Staff should provide a link to the financial policies and procedures, as well as bylaws, on every board agenda, to ensure board members can check policies during meetings and ensure the organization is in compliance.

Require staff to email bank and credit card statements to all board members each month. The nonprofit should also provide bank and credit card online account access for the Treasurer and President by title (i.e. treasurer@nameofnonprofit.org.) This control ensures nonprofit staff do not forge financial reports and ensures that the board catches any unauthorized expenditures quickly.

Ensure review of financial reports at every Board meeting. Every board agenda
should include the Statement of Financial Position, Statement of Financial Activity,
General Ledger report (showing all deposits and expenditures for the month) and a
report showing the adopted budget relative to actual revenue and expenditures.
The Statement of Financial Position and the Statement of Financial Activity should
compare the current fiscal period to a previous fiscal period, such as the previous
month or year, so it is easier for board members to identify discrepancies. If the
Board meets infrequently, the Finance Committee should review these reports. The
nonprofit should strive to have Board members review these reports monthly, if
possible, to correct actions well before they result in misuse.

[1] This Top 10 is provided as information for consideration only and does not constitute legal or professional advice or a recommendation by either Consero Solutions or Jill S. England, Attorney at Law.

[2] California Government Code Section 12586(e).